Who’s Who Legal brings together Kevin Butler of Conyers Dill & Pearman, Gregory Tan of Shearman & Sterling and Johan Mouraux of DLA Piper to discuss emerging domestic trends, the growth of alternative financing methods, popular target sectors and other key issues affecting the legal market.
Kevin Butler: As the Cayman Islands remains the jurisdiction of choice for offshore hedge and private equity funds, we see crossover from the funds industry in providing funds for project financing. Most of the finance projects that we are involved in relate to projects outside the Cayman Islands but with a connection to Cayman. Either the project will be held through a Cayman parent or the financing is being provided by a Cayman entity. With continued growth worldwide in infrastructure projects and energy projects, we often see the financing coming from the funds industry. This is especially true in energy projects over the last six to 12 months. A typical transaction may see the Cayman parent issuing notes or equity, and the investor(s) will be Cayman hedge or private equity funds.
Gregory Tan: Sourcing funds from non-traditional debt and equity providers using non-traditional structures is now often required and, with the right “fit” between the terms required by such providers that are different than those of traditional debt and equity sources, advantageous to the project. The sources and structures of alternative funding include high-yield bond purchasers, private equity and/or hedge funds, commodity traders, strategic/industry investors and, in the mining and metals sector, streaming and royalty companies. Depending on the industry, construction contractors may also represent a source of alternative funding. Even crowdfunding played a part in project financing this year, when SolarCity made a solar bond offering on its website: the first such transaction in history. Other innovative sources of funding include green bonds by yieldcos, which do not vary much from other traditional securities; however, investors with a strong renewable energy strategy may find them more popular as time continues.
Johan Mouraux: In the wake of the liquidity crisis a few years ago, so-called alternative sources of financing have emerged. In practice, in Belgium, this means that institutional investors have become more active, with insurance companies having geared up towards providing senior financing to project financed assets, in particular PPP. Belgium has seen less activity from pension funds (as compared to other countries), and this is probably because there are less (and smaller) domestic pension funds in Belgium. In the PPP sector, authorities have tried to create a favourable environment for the development of these alternative funding sources. In terms of instruments used, the market has seen institutional investors (seek to) provide funding through direct lending as well as project bonds (with actually only one notable project, the A11 road project having closed to date with a bond solution, the others being based on direct lending). The market is now quite “crowded”, with banks having recovered their ability and appetite for long tenors, and institutional lenders still present. This results in high liquidity in the market, and increased competition among debt providers and sources.
Kevin Butler: The majority of institutional investors in infrastructure debt are public and private pension funds and insurance companies. The long-term nature of most oil and gas projects often can provide a match to the long-term liabilities of the pension funds and insurance companies. Many infrastructure projects provide for predictable future cash flows. However, because of the risks of downward shifts in commodity prices together with the increased project size and complexity of oil and gas projects, it has in the past been challenging to find the right fit with institutional investors. Currently though, with commodity prices being on the lower end, there has been increased interest.
In addition to oil and gas projects, interest continues to grow with respect to renewable energy initiatives. As technology continues to advance, it becomes more feasible to see increased profits from projects such as wind farms, solar energy and other sources of renewable energy. As profits are more achievable, private equity and our sources of financing can count on an earlier exit strategy (whether by sale or IPO). In addition, for the investor that wants a long-term investment, a profitable project allows for different types of investment, including equity investment which will see returns through dividends.
Gregory Tan: Absolutely. There was a marked increase in the global deal count from 2013 to 2014: 608 in 2013 to 744 in 2014, according to league tables released by IJGlobal. The same source indicates that total global debt and equity investment rose to $303.5 billion in 2014 from $287.4 billion in 2013. These figures may be somewhat skewed by a handful of “mega” projects – particularly in the oil and gas sector and petrochemicals sectors – and, with current oil prices, we have already seen similar projects deferred or delayed in 2015. That said, deal count should remain robust in 2015, particularly in the power/renewables sector and in midstream oil and gas. Also, the infrastructure sector has noticeably picked up through 2014, and we are optimistic that this will continue into 2015.
Kevin Butler: The Cayman Islands as a jurisdiction is often used to set up vehicles because it is a neutral jurisdiction. By that I mean it adds no tax burden and little, if any, regulatory burden. In addition, it is a stable jurisdiction, both economically and politically, with good corporate governance. The laws are based on English common law and the highest court of appeal is the Supreme Court (Privy Council) in the UK. Investors, especially if there are a number of investors from around the globe, like to pool their money in a vehicle based in a neutral jurisdiction. Because of the stability of the jurisdiction combined with the light regulation, there is little need for regulatory or legislative changes especially as it relates to project finance for projects outside of the Cayman Islands.
On the local project finance side, there have been some regulatory and legislative changes that allow for a new hospital to be established for medical tourism (destination health care) with an emphasis on cardiology. The first phase of Health City Cayman Islands was completed in 2014 with the help of traditional bank project finance. It is a 104-bed facility with plans to expand up to 2,000 beds with a medical school, nursing school and hotels. Legislative changes in Cayman help control tortious claim awards against doctors and to allow for medical research in Cayman. Such legislative changes in Cayman locally allowed the project to happen with a resulting state of the art hospital and affordable destination health care.
Gregory Tan: The extension of the production tax credit, changes to the investment tax credit and the duties imposed on Chinese solar panel manufacturers will likely impact domestic US renewables sector – for instance, the reduction in the ITCs, and higher duties on Chinese solar components, will affect the economics for solar, particularly securitisation of roof-top solar portfolios. In the oil and gas sector, state legislation regarding fracking (whether bans (such as in New York) or lifting bans (North Carolina)), recently proposed legislation to expedite issuance of LNG export licences and recently guidelines restricting export of crude oil from the US, all warrant close monitoring.
Kevin Butler: The use of yieldcos in renewable energy finance projects has been of growing interest over the last couple years. It is an effective way to lower the cost of capital equity to finance on going operations and new project developments. Although Cayman structures have not been used yet, I see no reason why we won’t see Cayman structures used in the future.
Gregory Tan: Yes – and we expect yieldcos to remain an appealing option for strong sponsors with recognised track records and identifiable pipelines of future projects. As mentioned earlier, alternative forms of low-cost debt financing have proven successful for sponsors with renewable energy portfolios, including bank debt, asset-backed notes, and public bond offerings. Additionally, we expect to see more unique convertible or combination debt and equity investments as project development portfolios become scarcer, and thus more valuable. In these financings, investors are willing to take on a bit more development risk in order to capture the project pipeline and some potential upside.
Johan Mouraux: This has not yet been an active field of enquiry, but we do expect that this may change, with certain assets potentially interesting add-ons to existing foreign yieldcos. I would expect this to be of a cross-border nature with European yieldcos offering regulatory, subsidy and tax risk-spreading to investors investing in European renewable energy assets.
Kevin Butler: Conyers Dill & Pearman practises the laws of the Cayman Islands, BVI, Bermuda and Mauritius and we do so from the Island offices and also London, Hong Kong, Singapore and Dubai. Our spread of time zones allows for around the clock advice to meet our clients’ timetables. The way lawyers and law firms stand out is simple to me – be responsive. Our advice must be accurate and full – that is a given – but in order to impress the clients, the advice must be timely. That is what we provide.
Gregory Tan: The market for project finance remains strong, and we will continue to see increasing overlap and convergence with over practices, such as capital markets (project bonds), leveraged finance (term loan B financings – not only for acquisitions, but also now for projects with construction risk) and M&A, in particular. The list of issues that could have a very dramatic impact on continued activity in the project finance market is long – economic growth in China, uncertainty about Greece and the Euro, political instability in Ukraine and Yemen, political issues in Brazil, outlook for oil prices and energy reform in Mexico – but these same events also present significant opportunities (such as increased M&A activity as the market consolidates and continued growth of the yieldcos and non-traditional sources of financing) to those firms that stay ahead of these issues and are able to provide that “value add” to clients.
Johan Mouraux: The market is competitive, but since Belgium is a relatively small economy and, as such, legal market, few firms have dedicated or truly focused project finance teams. I believe the key to stand out is genuine knowledge of the asset class or geography in which you wish to operate. With ever-increased sophistication of investors and lenders, all expect irreproachable technical skills in project finance, but the difference can be made through industry knowledge of the particular (sub)-asset class or particular expertise in certain jurisdictions such as African countries.